26 November 2020

Spending Review 2020

“Our health emergency is not yet over. And our economic emergency has only just begun”.

These were the stark words from the Chancellor, Rishi Sunak yesterday as he delivered the 2020 Spending Review; with little indication as to how the Government intended on balancing the books and instead provided a heavy emphasis on spending in 2021/22:

There is an extra £38 billion of support for public services in this financial year, bringing the total spending on the Covid-19 response in 2020/21 to over £280 billion.
In 2021/22 there will be a further £55 billion of support for the response to Covid-19 including provision of PPE, the test-and trace system and the roll out of vaccines.
There will be £100 billion of capital spending in 2021/22 aimed at kickstarting growth and supporting jobs – £27 billion more in real terms than last year.
As part of a new National Infrastructure Strategy, a UK infrastructure bank will be created “to catalyse private investment in projects across the UK”. The new bank will be headquartered in the north of England and will start work next spring.
A new Levelling Up Fund was announced, worth £4 billion. It will be managed jointly between the Treasury, the Department for Transport and the Ministry of Housing, Communities and Local Government. Any local area will be able to bid directly to fund local projects.
Core spending power for local authorities will rise by an estimated 4.5% in cash terms in 2021/22. Local authorities will be able to increase their council tax bills by 2% without needing to hold a referendum and social care authorities will be able to charge an additional 3% precept to help fund pressures in social care. There will be £254 million of additional funding to help end rough sleeping.
The business rates multiplier will be frozen in 2021/22, saving businesses in England £575 million over the next five years. The government is also considering business rates reliefs.
Public sector pay will be constrained in 2021/22. NHS workers will receive an increase. So too will the 2.1 million public sector workers earning less than £24,000 a year, who will be guaranteed a pay increase of at least £250. Outside these two groups there will be no pay rise.
The National Living Wage (NLW) will increase by 19p from next April to £8.91 an hour, in line with the recommendation from the Low Pay Commission. The age at which the NLW will start to apply will be cut from 25 to 23. The National Minimum Wage rates will also increase.
£2.9 billion will fund a new three-year UK-wide programme to provide support to help over 1 million long-term unemployed people.
Spending on overseas aid will be cut from 0.7% of GDP to 0.5% in 2021/22. The cut will be restored “when the fiscal situation allows”.

This ultimately means that Government borrowing is only set to increase. Seven months into the pandemic and with Government support already offered by the way of the Job Retention Scheme (JRS), Self-Employed Income Scheme (SEISS) and local Government grants, albeit to name a few; it is expected that the Government has already borrowed around £215bn in response to the pandemic and with the total expected to hit £394bn this year, this is the highest level seen since the 1960’s.

Underlying the OBR’s (Office for Budget Responsibility) picture of the future path of the UK economy are a range of assumptions and projections, some of which Mr Sunak mentioned in his speech. On the OBR’s central scenario:

The UK economy is forecast to contract by 11.3% in 2020 without returning to its 2019 level until the final quarter of 2022.
After 5.5% economic growth in 2021 and 6.6% in the following year, growth tails off to around 1.8% in 2024 and 2025.
Unemployment will peak at 7.5% in the second quarter of 2021 and then will fall to 4.4% by 2025.
Borrowing will drop dramatically in 2021/22. This is the result of higher taxes in a recovering economy and an end to many of the temporary financial support measures, such as the CJRS.
From 2022/23 onwards, borrowing will settle at around £42 billion higher than the OBR had forecast in March.

It is not yet clear how the Chancellor is expected the cover the increase in Government spending over the next few years but the OBR alongside the Institute for Fiscal Studies and Resolution Foundation suggested that around an extra £40bn a year in additional tax would be required over the medium term. This would mean raising tax receipts by around 2% of GDP. Such an increase would require a range of measures across the full tax spectrum.